Apple's New Chip: Too Much Fear?

Yes, the Mac maker will face some tech hassles now that Intel's inside. But investor fears that have driven down the stock are likely overblown

It's been a rough month for Apple bulls. Jitters over Apple's (AAPL) transition to Intel (INTC) processors has sliced 21% from the stock's value since Jan. 13, with the shares closing at $67.64 on Feb. 14. The thinking was, when a major switch like this occurs, glitches inevitably follow, and some buyers will delay purchases until the kinks can be worked out.

For instance, such key applications as Adobe (ADBE) Photoshop require reworking for the Intel-based systems -- and the new versions might not go on sale until early 2007. In the meantime, Adobe Photoshop runs about 50% slower on the Intel-based iMac than on predecessor iMac G5, says Kevin Krewell, editor-in-chief of the chip-tracker newsletter "Microprocessor Report" (see BW Online, 2/13/06, "It's iMac on Steroids").


  Another reason for the bearishness? Some users may be waiting for Apple to introduce new computer designs in the second half, says Rob Enderle, president of tech consultancy Enderle Group.

Now it increasingly looks as though those concerns got overblown, and signs suggest Apple and Intel are managing the transition well. The two companies' first computer, the iMac with Dual Core Intel processor, has already turned into a best seller.

Don Mayer, CEO of Small Dog Electronics, an Apple products retailer in Waitsfield, Vt., says the Intel-based machines outsell iMacs based on G5 chips from IBM (IBM) by five to one. In fact, Intel-based iMacs are selling out quicker than the iMac G5 desktop did when it came out last October, he says. "As fast as they are coming in, [iMacs with Intel chips] are going out," Mayer says. "There's significantly more demand for the iMac now that it has the Intel processor."


  And that trend has cropped up at other retailers as well. "I am seeing very strong demand for the Intel-based products," says Shaw Wu, an analyst with American Technology Research. Moreover, retailers say they are seeing lots of pent-up demand for the MacBook Pro notebook. The machine starts shipping this week, Apple said on Feb. 14.

On Apple's own online store pages, buyers are notified they won't receive the laptop until three weeks to four weeks after placing their orders. "It's a precursor to good preorder activity," says Steve Lidberg of Pacific Crest Securities. Essentially, so many people must have already placed orders that Apple can't fulfill them fast enough.

Indeed, Charlie Wolf, an analyst with Needham & Co., expects Apple's computers business to have a fairly strong showing this quarter. The company should sell 250,000 MacBooks in its fiscal second quarter ending in March, up 18.5% from the 211,000 units sold in the same period of 2005, he figures. And Wolf believes Apple will sell as many as 350,000 iMacs in the quarter, vs. the 337,000 computers it sold in the same period of 2005.


  While that doesn't even come close to the 43% unit sales growth Apple enjoyed in early 2005, it still exceeds what many on Wall Street had expected -- considering that the company's older models aren't selling as well while buyers wait for Intel-based products.

In fact, the new computers' strong showing could serve as an indication that the transition won't cause Apple to lose as much share near-term as expected. The bears have long pointed out that, in the 1990s, when Apple moved from Motorola (MOT) processors to those co-developed by Motorola and IBM (right before the Intel transition, the company co-developed chips with IBM), Apple's market share dropped by more than half, to less than 5%.

Yet, this transition should go quite differently, largely because Intel-based Macs offer performance improvements over Apple's prior models. Many analysts believe that Apple's market share, if it does fall in the first half, will bounce back -- and possibly go higher -- by yearend. (Apple's share of the computer market slipped to 2.1% in the fourth quarter, from 2.3% in the first quarter, as buyers awaited Intel-based Macs.) "They certainly have momentum," says Richard Shim, an analyst with tech consultancy IDC.


  That's welcome news for Apple, as its margins on computers are much higher than its margins on the popular iPod digital music players. An iMac brags 31% gross margins to iPod's 21%, figures Wu. All the better if the iMac and other computer products account for a greater portion of the business, as Wu expects they eventually will.

The strong Intel-Apple shipments also bode well for Intel, itself in need of some good news of late. The company missed Wall Street's fourth-quarter revenue estimates as its archrival AMD (AMD), boasting more-powerful chips, ate into market share (see BW Online, 1/18/06, "Intel's Supply Stumble").

That SAME quarter, AMD's market share of server, desktop, and notebook processors rose to 21.4%, from 16.7% in the year-ago period, while Intel's share dropped from 82%, to 76.9%, estimates Dean McCarron, owner of PC components consultancy Mercury Research.


  Intel may continue losing market share to AMD in the first half -- until Intel releases several new processors, some analysts say. So the company will surely welcome a boost from the Apple alliance. In a given quarter, a percentage point of the processor market share equals about 500,000 chips shipped, figures McCarron.

Apple ships more than 1 million units a quarter. While that volume will help Intel only gradually (the transition will likely take at least six months), the Apple business should at least slow the share losses to AMD.

Apple's transition can't escape the bumps. But there may be fewer of them than some bears seem to think.

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